Home purchasing

Rising interest rates cost typical home buyers 16% of their buying power

As interest rates rise, a good chunk of homebuyers have lost up to $165,000 in buying power on new homes in the past year, according to recent research by online real estate broker Redfin. .

Interest rates on 30-year fixed rate mortgages have risen from an average low of 3% to around 6% in the last year alone. As a result of these rate increases, mortgage costs rose by a median increase of 49%. This allowed potential buyers to afford less on the same budget, Redfin finds.

By the end of 2021, a homebuyer with a monthly mortgage budget of $2,500 could afford a home worth up to $517,500. But for the four-week period ending June 15, 2022, that same buyer could only afford a home worth up to $399,750, a $120,000 drop in buying power. The median monthly mortgage payment in the United States is $2,391 in June, according to data from Redfin.

Even homeowners able to spend more than that are seeing the value of the homes they can buy go down. Buyers with monthly mortgage budgets of $3,000 or $3,500 lost $141,250 and $165,000 in buying power, respectively, according to the study.

The Redfin data makes a few assumptions: the mortgages include a 20% down payment, a 1.25% property tax rate, a 0.5% home insurance rate, and no homeowners association dues.

“Many house hunters must now consider smaller homes – perhaps further from their ideal neighborhood – or stick to renting if they are completely out of the market,” writes Redfin’s chief economist, Daryl Fairweather, in a blog post accompanying the data.

For sellers, “homebuyers’ smaller budgets mean they can no longer expect to get the best price for their home.”

The study also looked at the share of affordable homes with a monthly budget of $2,500 by metropolitan area. With a jump in interest rates from 3% to 6%, the national share of affordable housing fell by 16%.

However, the biggest declines in affordability have been in places that have become popular home-buying markets during the pandemic and are often known for their low cost of living: Phoenix, Raleigh, Las Vegas, Salt Lake City and Austin.

Expensive real estate markets like the Bay Area or New York saw the smallest decline in affordability, but only because those markets already had limited affordability for monthly mortgage budgets of $2,500.

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